Dr. Huiyan Qiu

Homework Assignment #1

Due: February 17, Monday, drop in TA’s box by 6PM

Unless explicitly specified, bond pays coupon interest semi-annually.

1. (a) Provide the list of currently outstanding Government Bonds in Hong Kong.

Information should include at least the maturity date, the coupon rate, and the size of each bond. (b) Describe the most recent Hong Kong Government Bond issuance under the Institutional Bond Issuance Programme.

2.

The portfolio manager of a tax-exempt fund is considering investing $500,000 in a zero-coupon debt instrument that pays an annual interest rate of 5.7% for four years.

At the end of four years, the portfolio manager plans to reinvest the proceeds for three more years and expects that for the three-year period, an annual interest rate of 7.2% can be earned. What is the expected future value of this investment?

Assume all rates are compounded annually.

(b) Suppose that the portfolio manager in the above question has the opportunity to invest the $500,000 for seven years in a zero-coupon debt obligation that promises to pay an annual interest rate of 6.1%, compounded semiannually. Is this investment alternative more attractive than the one above?

(a)

3. Consider a bond with $1,000 par value and coupon rate of 5%. The bond has 2.15 years remaining until maturity. Suppose the discount rate is 6.5%. Calculate the accrued interest, the “dirty price” of the bond, and the “clean price” of the bond.

4. Consider a bond selling at par ($100) with a coupon rate of 6%, and 10 years to maturity.

a) What is the price of this bond if the required yield is 15%?

b) What is the price of this bond if the required yield increases from 15% to 16%, and by what percentage did the price of this bond change?

c) What is the price of this bond if the required yield is 5%?

d) What is the price of this bond if the required yield increases from 5% to 6%, and by what percentage